The Unconscionable Tax Break Given To Hedge Fund Managers

Ed note: The following
floor speech was delivered by Senator Carl Levin
(D-Michigan)

The Republican leaders demand [a] sacrifice be made by the middle
class in order to protect the Bush tax cuts and other tax breaks
for the wealthiest among us – despite the huge and growing gap in
the distribution of income in our country between the wealthy and
the middle class.

Just one example of the kind of tax breaks and tax loopholes we
Democrats seek to change is the unconscionable tax break given to
hedge-fund managers. Hedge fund managers generally make their
money by charging their clients two fees. First, the
manager receives a management fee, typically equal to two percent
of the assets invested. Second, the manager typically
receives 20 percent of the income from those investments above a
certain level. This 20 percent share of the investment returns
from hedge funds is known as carried interest. Under
current law, most hedge fund managers claim that this carried
interest qualifies as a long-term capital gain, currently subject
to a maximum tax rate of 15 percent, rather than being taxed as
ordinary income, currently subject to a maximum tax rate of 35
percent.

But a moment’s analysis shows that this money is ordinary income
by any fair definition and should be treated that way. The 20
percent fee is not capital gains, because it applies not to
capital that the hedge-fund manager has invested, but to the
payment he receives for investing capital that other people
provide. Pretending that the 20 percent fee is capital
gains when in fact it is payment for a service is an
Alice-in-Wonderland argument that elevates fiction over fact...

Mr. President, we must raise the debt ceiling. This is not an
opinion; it is fact. The
consequences of failing to act are simply too catastrophic to
consider any other course. Negotiations are now under way seeking
an agreement to raise the debt ceiling as part of a larger
agreement on deficit reduction. But there is a major obstacle to
agreement: A refusal on the part of our Republican colleagues to
compromise, a refusal to understand that sacrifice must be
shared.